Bear at $10:
Done Deal?
Challenges Are Inevitable
And Courts Could Rule,
But Higher Price Unlikely
March 25, 2008; Page C1
When you throw out the rule book, whose rules apply?
It's all pretty confusing in the case of Bear
Stearns Cos. For now it appears to be under the whim of the Federal
Reserve. Unless the wishes of Bear's battered shareholders prevail.
Which means it's really in the hands of the Delaware courts. Until,
perhaps, Congress says otherwise.
![[Alan Schwartz]](http://s.wsj.net/public/resources/images/HC-FL003_Schwar_20051013200534.gif)
Bear's J.P. Morgan-led bailout has already been a
historic test for the financial markets. But Monday's recut deal also
could test some long-held conventions of corporate law: At what point of
emergency are shareholder interests superseded by national ones? If
there isn't such a standard, might Congress override states to make it
so? J.P. Morgan Chase & Co.'s newest deal -- recut over the
weekend -- presents a dilemma for Delaware, the nation's preferred
corporate legal battleground. The agreement locks in J.P. Morgan's deal
tightly, so tight as to fall under inevitable challenge from
shareholders.
What they're most likely to protest is the sale of
39.5% of Bear to J.P. Morgan, along with indications that Bear board
members will also throw their shares behind the deal. If that weren't
enough, J.P. Morgan also has the right to Bear Stearns's headquarters
building, no matter the deal's outcome. It's their way or the highway.
These features are supposed to give the buyer comfort
that it can close the transaction. Having stepped up to stabilize Bear,
J.P. Morgan fairly reasons that it -- and not another buyer -- should
profit from taking that risk.
Indeed, it's possible a Delaware court could find these
features coercive, and depriving shareholders of a true vote. It could
stop the merger plan, which, of course, could set off a range of
possibilities from renegotiation to bankruptcy. And that has all sorts
of consequences the Fed was trying to avoid in the first place. Whose
wishes prevail then? It's hard to say.
"One of the anomalies of American corporate law is that
the little but sophisticated state of Delaware really sets the rules,
and this case makes that very evident," said Stephen Fraidin, partner at
law firm Kirkland & Ellis.
Bear's shares closed Monday at $11.25, still higher
than then approximately $10 per share offered by J.P. Morgan. But people
directly involved with the deal say it is highly unlikely that the
current price will be sweetened again.
In fact, these people viewed the current price as
something of a coup given Bear's parlous state of just 10 days ago. Bear
"had no choice" but to take the original $2-per-share offer "because
survival was better than dying," one of these people said. If the bank
had a full month, "it could have sold for a lot more money." One option,
for instance, was an equity infusion by a private-equity fund led by J.
Christopher Flowers. On March 15 and 16, Mr. Flowers was trying to get a
deal together with the aid of a number of large banks. But to do so in
the few hours required by the Fed was "impossible."
"The $2 kept the doors open, and bought a contract. The
contract guarantee bought time," to upgrade the price and rewrite the
contract during the weekend, this person said.
![[Chart]](http://s.wsj.net/public/resources/images/MI-AP641_Bear_20080324190814.gif)
Inside Bear, officials are still howling over the
events of the past week. For months they had been asking the Federal
Reserve to open up its discount window to lend against broker-dealer's
collateral. The entreaties also came from other securities-firm CEOs
such as Morgan Stanley's John Mack and Lehman Brothers
Holdings Inc.'s Richard Fuld, says a person briefed on the talks.
Even on the weekend of the bailout, Bear Stearns had
more-than-adequate capital, this person said. "It wasn't about bad bets
or bad inventory, it was like the 1930s. Everyone wanted cash on the
same day. It was purely a liquidity panic." The Fed did open the window
-- but only after it was too late for Bear Stearns.
"You have a regulator that is making suggestions and
also has power to regulate if those suggestions aren't being taken,"
says Eric Chiappinelli, associate dean at Seattle University's law
school. "That's different than what you usually see."
The Fed appears to have quelled the panic for now. And
in planning for future emergencies, it's reasonable for the Fed and
Congress to keep as many options open as possible. But before long it is
bound to cross paths with states and shareholders. There's still much in
this rule book left to be written.
• Email
dennis.berman@wsj.com1.
For up-to-the-minute analysis of deals and deal making, visit
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